Business Acquisition Financing

The first step is to know which company you wish to acquire. This could be a competitor, a company that operates in another territory from your own or one that would allow expansion into other marketplaces. In many cases, people seek business acquisition financing when they have been offered the opportunity to purchase another business.

Negotiations are often lengthy; there is much to be agreed on, not least, the value of the company being acquired. These talks will have to include the finance company. They need to be certain that the value you put on the business to be bought matches theirs. Large sums are likely to be involved. There will be many meetings involving all parties before a deal is reached.

A loan may seem the obvious way to finance business acquisition but let's look at the alternatives first:

Company Funds or Equity

This involves using money and assets your company already owns. If your business is cash-rich, it might well be able to finance the bid itself, but while it is usual to provide some up-front cash, it is rare for a business acquisition to be entirely funded in this way. There are many other financing options that don't leave your own business starved of operating funds and the dangers that may lead to. You also have to bear in mind that extra funds are likely to be needed in the post-acquisition period.

The target company owners will probably be keen to retain some say in how their business runs going forward. Offering equity based on the business's agreed valuation may offer an opportunity to reduce the amount of finance needed to seal the deal. It also often makes the transition period run more smoothly if the incumbent management team shoulder some of the responsibility.

Earnout

Earnout is a way of spreading the costs of a business acquisition. Basically, part of the valuation is paid up-front, and then a percentage of the gross sales or earnings are passed over to the original owners for an agreed period. There is usually a performance aspect whereby only after certain targets are exceeded do the payments commence.

This arrangement can benefit both the seller and the buyer. The seller receives compensation for future growth, and the buyer defrays some of the costs of acquisition. Not surprisingly, any agreement needed for earnout is a complex one.

The Issuing of Bonds

Strictly, the issuing of bonds is a way of getting a loan but is usually more efficient and less costly than a bank loan. It allows a fixed rate of interest over a longer period than is typical of other forms of finance. The master loan agreement, or bond indenture, includes all the relevant information an investor needs: time scale, interest rate, and so on. This means that individual negotiations with numerous investors are not needed.

Merger

If you can agree on a merger with the other business, then the immediate costs will be far lower than buying another company outright. Finding another business where the synergy with your own is a match is the difficult part. There is also the question of losing some of the control of your own business to be taken into consideration. When it works, it can be good for both parties; the problem is, it doesn't always work.

A loan obtained for business acquisition is specifically intended for the buying of another business and is the most common way of funding such an operation. The lender will place tight restrictions on the loan, and there will be a time limit on its use.

A business acquisition loan is exactly what it says: a loan provided for the acquisition of a business. However, when negotiating the loan, you should take into account the running costs needed to cover any teething problems after the acquisition.

Most business acquisitions are costly. As the stakes get higher, so does the application process become more exacting and the qualification more difficult. Excellent credit scores for both the owners and the business are imperative, as is a good trading history, profitability, and immaculate financial records. You will also almost certainly need to provide a percentage of the money needed and collateral.